My Finest Hour

by Dana Blankenhorn

I read this piece, from December 7, 1998, over again-and-again for this
book, and in retrospect it's one of my best.

At the height of the Internet gold rush I correctly identified what was
happening, fingered one of the more public culprits, and predicted that
the game would end soon. Not bad for a struggling journalist...

Wall Street 1999

Usually I write about Internet Commerce, but this week I think we should
all consider the impact of the Internet on commerce, and on the real economy.

So who'll play James Cramer when this sequel to the movie "Wall Street"
comes out? He's obviously the Gordon Gecko of this age, but I'll predict
right now his importance will be no more lasting than those of his 1980s'
counterparts.

The fact is the Web has enabled a takeover of the world's largest asylum,
Wall Street, and the inmates are running wild. From "day trading"
rooms , and behind the screens at Web trading sites , individual investors
are calling the shots, a few hundred shares at a time. This can be seen
most clearly in the market for Internet-related issues. It started last
summer, when professionals using conventional valuation techniques sold
Yahoo and Amazon short, knowing they weren't worth what the "screen
savers" were paying.

But here's what happened. While Yahoo and Amazon have a lot of stock, very
little of it trades. So small changes in supply or demand for this "float"
can have a big impact on price. Remember that 10,000 people buying 100
shares each represents 1 million shares of demand, and there are now hundreds
of thousands of such investors. (The average trade in Yahoo and Amazon
in the last few months has been just 300 shares, CNBC reporter David Faber
has reported.) Thus the pros had to buy back shares and take huge losses.
When the shorts retreated, and an autumn bear market turned into a mere
correction, the way was clear for the real fun to begin.

When the threat of "shorting" - selling a stock now hoping to
buy it back for less - is removed, many Internet issues become as easy
to manipulate as penny stocks were a decade ago. (Cramer notes you can
also short a stock by "buying a put," an option to sell at today's
price in hopes the price will fall before you have to put out cash.) Since
the signals that induce day traders to move come in the form of price changes
on screens there's no conspiracy here. The game is legal. Without short
sellers, however, there's no one placing bets that can make a target fall
in price and provide discipline to the market.

Let's say you were in on the move in Yahoo. What was $10,000 is now $80,000,
and it's now easy to borrow $40,000 on the position with which to buy eBay
for $50/share. Within a few weeks you've now got $160,000, so you get downwind
of its competitor, OnSale, trading two weeks ago around $20. (It went up
to $100, then back down to $50 within a week.) You're a player now. Since
the businesses are real, "news" (like a loss exceeding analysts'
expectations) can be planned for. If you lighten up on your winners slowly,
you're making real money. And if you're still at your day-trading screen,
you can play this slot machine hundreds of times during any move.

If this game sounds familiar, you get our 'A' in history. The same game
was played in the late 1920s by amateur investors. The game ended with
the October, 1929 stock market crash. The problem, as with all speculative
bubbles, is that if gains aren't driven by real profits, a market correction
can become a collapse. The people who run the markets were doing their
best to change that psychology, until they decided a market fall threatened
the global recovery. But even if Alan Greenspan is in cahoots with you,
a bubble is still a bubble. The game ends when there's a true rout that
forces players out of the markets. Many thought that rout came last summer,
and shares fell 25% in value on average, but the quick rally back to old
highs emboldened the plungers. (This game will likely end as it did in
1929, with a recession. President Hoover denied the next year that recession
was occurring. "It's just a small depression," he said.)

Over the last week the game has accelerated. It's also gotten more dangerous,
moving from multi-billion dollar plays like Yahoo to smaller, more easily-manipulated
issues like Books-A-Million. Even Davvix, a Christian community site, found
itself used in this way when it announced it would sell gospel music online.
(Cramer, to his credit, calls such plays "bad Internet," but
it's the overvalued "good Internet" profits that fuel the game.)
The constant churn has left those who didn't move quickly enough with big
losses. Unlike the situation in a real casino, the wheel doesn't stop so
you can cash out in comfort. The more you've got, the harder it is to get
out the door with your gains.

The mania holds important lessons for Internet Commerce. First, cheap liquid
markets are no protection against manipulation by a herd. Second, the Internet
speeds up everything, both good and bad. Third, short sellers aren't all
bad. Fourth, lots of stock trading sites will go under when the losers
sue over what they did to themselves or just renege on bad trades. Fifth,
we're all going to be hurt when the bubble bursts, and being on the Internet
won't prevent that. Sixth, fulfilling orders, on both the buy and sell
side, is the key to staying in an Internet business for the long haul.
Finally, don't be confused by small hiccups in stock prices - when the
bubble bursts, the explosion will be heard everywhere. (How bad will the
crash be, whenever it comes? See the history of Japan, from 1987 to the
present, for answers.)

There's a Pulitzer Prize for the reporter whose paper funds even two weeks
in one of these trading rooms, profiling the traders, the systems, and
the atmosphere. If you're a publisher, consider this a book proposal...

Prince Was Right

My predictions for 1999 were just a year off - most of them happened in
2000. But I did correctly identify the Nostradamus of our time - Prince
Rogers Nelson of Minneapolis, Minesota. Princes' song "1999,"
written in the early 1980s, certainly did a better job of predicting what
would actually happen in society than either George Orwell's "1984"
or Arthur C. Clarke's "2001."

By 1984 the world wasn't entirely ruled by oligarchies, and I still don't
have a zero-gravity toilet. But the Bard of Minneapolis was right - "2000-0-0
party over, out of time..."

This column ran on December 28, 1998:

Tonight We're Gonna Party Like It's...

Did you know "the artist formerly known as Prince" was a great
computer engineer? It's true. He apparently discovered the Y2K bug way
back in the early 80s. Listen to this lyric - "Year 2000, 0, 0, party
over, out of time. So tonight we're going to party like it's 1999."

In that lyric, The Artist may have also been speaking of electronic commerce.
Most large companies will be consumed this year by compliance testing for
the Y2K bug. The bug itself isn't that hard to stamp out. (My wife, who
writes transaction processing programs in Cobol, told me you can write
a subroutine stating if a new date is 60 less than the most recent date,
it's a valid date. I pointed out this creates the "Year 2060"
problem. She replied. "None of these programs will be running then."
My riposte: "That's what they said.") The problem is finding
the little bugger, then making sure everything will keep running at the
appointed time. You can't just run a test of January 1, 2000. You also
have to run multiple months, and multiple years. (Don't forget that 2000
is a leap year, while 1900 was not.) This is what is earning your contract
programming friends all that $150/hour overtime.

Assuming your small company has gone through all this tsuris, you have
a huge opportunity. You can write, and build, new applications and new
features, knowing the big boys can't match you. I know some Clueless stock
analysts have predicted that "Wal-Mart is going to squash Amazon like
a bug." My point is that won't happen right away.

Now that we have the Big Story down - the 1999 Lewinsky if you will - what
other trends can we see in Internet commerce for next year? Here are several:

The Internet stock bubble is going to burst. This one I can guarantee.
Regulators and analysts are busy poking at it now, with dire warnings and
margin requirements. They hope they can just let the air out of the balloon
gently. My prediction is that won't work. When this thing pops, they'll
be pus all over the market, including scandals where Internet stock trading
sites go under for reneging on trades.

The big story for early 1999 will be customer service, or the lack of it.
Many, many Web merchants ramped up for this Christmas without scaling their
fulfillment systems. The magic word for Groundhog's Day will be "outsourcing."
Expect lots of stories about OrderTrust LLC, which built Lycos' online
store, followed by some pieces on its competitors.

The marriage between online and broadcasting, made last year, will be cemented
this year. It will no longer be enough to just have broadcast commercials
about your Web site. You'll need good commercials. These Web sites have
had bad commercials and they'll pay for it.

Expect a lot of Clueless stories beginning something like this. "It's
no longer electronic commerce anymore - it's commerce." Well, yes
and no. It's true everyone competes online. But these are not the Cola
Wars - you don't just have a few "survivors," then a brutal "shake
out" which leaves one or two giants carrying the field permanently.
There will be a lot of winners in a lot of niches.

There will be a lot of "sturm and drang" over issues of measuring
Web ads, and tracking their results. There will be a lot of calls for standards.
Many committees will meet long into the night, and there will be heavy
balloting on proposals. They will be no closer to a solution at this time
next year than they are now.

Judges all over the world will issue Clueless rulings that seem to ban
gambling, obscenity, spam, and even plain old commerce, rulings with teeth
in them. Expect a lot of Web sites to move across borders as a result.
(Above.Net has already agreed to put a server farm in the Philippines.
Are the Cayman Islands next?) The real battle over Internet freedom will
occur at the international level, as diplomats try to hammer out agreements
on when "extra-territorial" decisions regarding the Web will
be respected.

Finally, remember what the Internet can do. Unlike any media that's gone
before, the Internet can model every phase in a customer's relationship
to a business, or a business' relationships with other businesses. It's
not about putting up pages, or generating traffic, or integrating databases,
or even big sales numbers. It's about changing relationships and responding
to those changes. It sounds revolutionary, but it's not. As Milo Mindebender
said in Joseph Heller's "Catch-22," "just think of it as
evolution in action." And evolution doesn't have an end-point.